Tuesday, August 19, 2014

European Dependence on Russian Energy

In the short-term it seems clear that the Russians have power (no pun intended) given the dependence of many countries on Russian energy supplies. Over the longer-term, however, it seems likely that the switch away from Russian energy supplies could be disastrous for the energy export-dependent Russian economy.

The sanctions on Russia do not involve stopping the import of Russian energy, but other sanctions could lead to retaliation from the Russians in terms of energy exports or imports. Indeed the Russians have banned food imports from major Western countries. This will undoubtedly punish those exporters to Russia, but will also lead to food shortages in Russia itself. According to this report from the NYT, Russian bans on food imports will advantage Chinese producers.

1 comment:

This could be disastrous for Russias energy exports to Europe, though Russia seems to be consciously shifting its long term focus away from Europe so as to minimise ongoing overexposure to outside forces and US leverage, with the need for this only being emphasised by the Western sanctions and their affect on Russias financial markets amongst other things, as well as Americas own push into the Gas market.

It seems though that the EUs economy is not in a position to be undertaking sanctions to any degree that would really be damaging to Russia, while not doing equal, if not more damage to their own individual nations economies, and in turn the Euros valuation. Old Vlad seems to be well aware of this, as he is almost 'asking' for the sanctions, though there could be reason for this - previously allowing the Cypriot banks to fail, which in turn sending a message to Russians that were using Cyprus as their offshore cash haven, that if your money is outside of Russia, it will not necessarily be looked after, and then the recent sanctions on particular people and their assets in the West. All of which sends a strong message to (mostly rich) Russians - your money is safer in Russia. This could be a larger plan to arrest 'capital flight' from Russia, which is a major issue for their internal economics, while simultaneously securing relevant geopolitical assets in Ukraine, as best they can, as well as reasserting themselves in the face of Western aggression - which is very popular with Russians on the whole.

Ultimately it seems to be be China and the US that stand to gain the most from this, but there is potential for this to be part of the 'game plan' for Putin. Otherwise their retaliation via Foodstuffs, and more recently the Car markets, while harsh, would be met with Europe seeking to de-leverage themselves from exposure to this kind of 'retaliatory diplomacy' - so in turn their reliance on Russian energy supply, which is very much in the US's interest if it wishes to compete, and win against Russia, considering the US's the large logistical issues with bringing their Gas to the European market - the most important of which is price.

It will be interesting to see the flow-on effects of this - from the positive benefits for Chinese producers to the potential losses that EU markets will suffer as the real effects of these sanctions start to be felt, and what this will mean for the region, as well as the world and geopolitics, especially when the 'history' between the nations involved is considered.

It is quite a gambit. Perhaps 'cold war: the game' will get taken off the shelf, given a dust and given another play in the 21st century.